DBRS Confirms CIBC at AA and R-1 (high); Trends Stable

DBRS Limited has today confirmed the ratings of Canadian Imperial Bank of Commerce (CIBC or the Bank) and its related entities, including the Bank’s Deposits & Senior Debt at AA and Short-Term Instruments at R-1 (high). All trends are Stable.

The ratings are supported by the Bank’s lower-risk retail business mix, the result of a well developed Canadian consumer distribution network, substantial presence in domestic wealth management, and improvements in its expense ratio. Constraints on the ratings include a history of earnings volatility, the result of weak risk management, primarily stemming from its wholesale banking businesses. With a tighter risk management framework and a greater Canadian client-focus, the capital markets business is expected to deliver more consistent and sustainable performance going forward.

The structured credit business, which was one of the primary contributors of earnings volatility for the Bank over the last three years, continues to be reduced in size. Since the Stable trend was placed on the ratings on June 16, 2010, total gross exposures in the structured credit runoff business have decreased from US$28.7 billion at April 30, 2010 to US$24.4 billion at April 30, 2011. There have been more opportunities to sell positions, which has been a contributor to the reduction in exposures.

CIBC’s current strategy should contribute to earnings stability and improved capital levels, thereby better positioning the Bank for future downturns. As capital is freed up from the reduction in the run-off book, DBRS would like to see resources deployed in less volatile businesses that are a natural extension of existing capabilities. The latest financial crisis provided CIBC with the opportunity to purchase CITI Cards Canada Inc.’s Canadian MasterCard portfolio which DBRS believes is consistent with CIBC’s desire to accelerate growth in its core banking business by strengthening its number one position in credit cards and being a dual credit card issuer in Canada.

As the Canadian banking regulator moves towards the application of Basel III capital rules, CIBC is in a good position given its capital levels. At the end of Q2 2011, the Bank’s tangible common equity to risk weighted assets ratio, as determined by DBRS, was 10.1% (which is above the average of its peers) while the Tier 1 capital ratio was 14.7%, the highest relative to peers. DBRS’s expectation is for ongoing strength in capital prior to the implementation of Basel III. According to CIBC, the Bank is meeting Basel III 2019 common equity standards at the end of Q2 2011, which is estimated at 7.8%,.

CIBC’s long-term Deposits & Senior Debt rating, at AA, is composed of its assigned intrinsic assessment of AA (low) and its support assessment of SA2 (reflecting the expectation of systemic and timely external support by the Government of Canada). The SA2 ranking results in a one-notch benefit to the senior debt and deposits and subordinated debt ratings.

Based in Toronto, Canadian Imperial Bank of Commerce has full-service banking operations in retail and wholesale banking and wealth management in Canada and a retail business in the Caribbean.

CIBC has three segments: CIBC Retail Markets, Wholesale Banking and Corporate & Other. CIBC Retail Markets (personal and business banking, wealth management and FirstCaribbean) and Wholesale Banking (corporate and investment banking and capital markets) generated operating net income of $1,180 million and $248 million, respectively, in H1 2011. The Corporate & Other segment generated net operating income of $12 million (excluding the gain from the sale of CIBC Mellon Trust’s issuer services business).

CIBC Retail Markets has a sizable Canadian retail banking operation; it is the largest issuer of premium travel credit cards, one of the largest full-service brokerages and has the third largest branch network in Canada. At the end of fiscal 2010, CIBC had more than 3,000 accredited financial advisors in its full-service brokerage and branch system. The Bank also has a large retail business in the Caribbean through its 91% ownership in FirstCaribbean International Bank (FirstCaribbean). Wholesale Banking is a client-focused investment bank based in Canada. It has strengths in mergers and acquisitions and equity underwriting in Canada and is expanding its debt underwriting capabilities, in both government and corporate bonds.

Canadian Imperial Bank of Commerce is the fifth largest Schedule 1 bank in Canada as measured by assets ($384 billion) at the end of Q2 2011.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organizations (January 14, 2010), Rating Bank Preferred Shares and Equivalent Hybrids (June 29, 2009), and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments (February 11, 2009), which can be found on our website under Methodologies.

The sources of information used for this rating include information provided by the Canadian Imperial Bank of Canada, Investment Funds Institute of Canada, Bank for International Settlements, and Office of the Superintendent of Financial Institutions Canada. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

For additional information on this rating, please see Banks and Banking Organisations Linking Document Linking Document by clicking the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

Lead Analyst: Brenda Lum
Rating Committee Chair: Brenda Lum
Initial Rating Date: December 31, 1980
Most Recent Rating Update: June 16, 2010

There are no cumulative preferred shares outstanding.